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India should separate trade from diplomatic relations

November 26, 2012

A surprising fact came to light recently when Indian Commerce and Industry Minister Anand Sharma told the Legislative Assembly that India has a trade deficit with 48 nations both during the last three years as well as during 2012-13 (April-September). Out of these the names of top 10 countries are China, Switzerland, Saudi Arabia, Australia, Nigeria, Kuwait, Iran, Iraq, Korea and Qatar.

India had the highest trade deficit of about US$40 billion with China in 2011-12. Declining exports and increasing imports have pushed the country’s trade gap to a record high of US$ 21 billion in October.

Experts expect that the yawning trade gap which is the biggest bone of contention between the nations will continue to rise in China’s favour, unless India is able to boost her manufacturing and increase investment led growth rather than consumer led. According to them, lethargic government policies, that enabled wages and commodity prices to rise, didn’t give enough impetus to manufacturing, which consequently staggered. Coupled with poor infrastructure, a dismal political will and fiscal policies that were maxed out, India’s manufacturing dream of being the second largest manufacturing economy were nipped in the bud.

Fed by the urge to spend, consumers were given incentives to buy, however with supply falling short, prices started rising leading to even higher inflation rates. The same experts then believe that over the next few years the trade deficit between our nations will further widen as more cost effective Chinese goods will replace Indian goods filling the requisite demand already built in the Indian shopping basket.

Furthermore, with inflation literally taxing real incomes, interest rates dropping and operational costs rising, the Indian economy and its government are in real need for an overhaul. The investment climate needs to be altered to enable more investment led growth, manufacturing and agricultural industries need to be given a boost and the fiscal and monetary policies need to be relooked at. Macro changes, yes, but before India blames China for a trade deficit it created it should think twice. Before India reacts by diplomatic disapproval hinged on the trade deficit she needs to get her house in order. Before she blames the basket of goods on China not opening up her economy, India needs to see what she is offering her neighbour. International economics is always a game of give and take, a trade deficit with 48 nations cannot be blamed on them, India needs to set her record straight.

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